Theme 3 - The impact of exchange rate changes

?
  • Created by: becky.65
  • Created on: 13-02-18 09:58
What is the current account of the balance of payments?
It provides information on trading activities and income from abroad
1 of 14
What happens when the currency depreciates?
It makes exports more competitive and can lead to a current account surplus when exports are selling well
2 of 14
What effect might an economic boom have on the balance of payments?
If the economy is growing, there may be increasing demand for imports. Domestic aggregate demand will be strong, so exporters may be able to sell most of their output in the home market, this may lead to lower exports and a current account deficit
3 of 14
How can a current account deficit be balanced?
By FDI or financial transactions
4 of 14
If the outflow exceeds the inflow then what will happen?
The exchange rate will depreciate, which will make exporting more profitable and imports will be dearer so buyers will look for domestic products
5 of 14
What happens to the exchange rate in recession conditions?
Incomes fall so fewer imports are demanded so businesses try to sell more abroad, creating a current account surplus and appreciating the exchange rate
6 of 14
What will all the changes of exchange rate be subjective to?
Time lags and how price elastic the products are
7 of 14
How can businesses use forward markets?
They buy the currency that they will need in the future at a fixed price and will be protected from exchange rate risks until they have use up all the currency they bought
8 of 14
How can export growth create jobs?
If money is spent on cheaper imports, then consumers have more disposable income to spend on domestic industries that will need to employ more people; competitive businesses recruit more employees as their costs are cut
9 of 14
How can inflation affect exchange rates?
Inflation leads to rising prices which can reduce competitiveness as importers look cheaper than domestic products. There will be depreciation as demand for exports falls and demand for cheaper imports rises. This will restore export competitiveness
10 of 14
What effect does FDI have on the exchange rate?
It creates demand for the currency of the destination economy, which will push up its exchange rate in the short run and if the FDI increases exports this will increase the exchange rate in the long run
11 of 14
What is the long term effect of FDI on the exchange rate?
It will make it appreciate, but FDI will increase employment and incomes in the destination economy, which will encourage consumers to spend on imports, pushing the exchange rate down
12 of 14
How has the Eurozone benefited businesses and individuals?
A single currency does away with the need to make payments in a foreign currency so it reduces the cost of financial transactions, saves time and trouble and makes trade easier in the Eurozone
13 of 14
What happens if a member state of the Eurozone becomes less competitive?
Its export sales will fall, its trade deficit with the rest of the Eurozone will increase. Therefore, an income reducing policy will have to be introduced to cut costs or reduce inflation
14 of 14

Other cards in this set

Card 2

Front

What happens when the currency depreciates?

Back

It makes exports more competitive and can lead to a current account surplus when exports are selling well

Card 3

Front

What effect might an economic boom have on the balance of payments?

Back

Preview of the front of card 3

Card 4

Front

How can a current account deficit be balanced?

Back

Preview of the front of card 4

Card 5

Front

If the outflow exceeds the inflow then what will happen?

Back

Preview of the front of card 5
View more cards

Comments

No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Globalisation and trade resources »